Bryan Caplan  

Krugman, Landsburg, Pangloss, and Fixed Costs

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What I Thought, at Age 16, Aca... Media Bias and Asymmetric Insi...
Krugman:

Think of the government budget as involving tradeoffs similar to those an individual household makes. On one side, there are all kinds of things the government could be doing, from dropping freedom bombs to providing children with dental care; think of each of these things as involving a certain marginal benefit per additional dollar spent, with the marginal benefit declining in the total amount spent on each concern...

What the government should do, in this case, is set all the marginals equal: the marginal benefit of an additional dollar spent on bombs, dental work, national parks, soup kitchens, etc, should all be equal, and this common marginal benefit should equal the marginal cost of raising an additional dollar of revenue.

Now suppose a disaster strikes. What this does is raise the marginal benefit of spending on disaster relief. The appropriate response is to move all the marginals to get them in line: spend less on everything else, and also raise more in taxes.
Landsburg:
In a radical departure from his previous expressions of dissillusionment, Paul Krugman has implicitly declared in his latest blog post that we are now living under the best of all policy regimes...

Since Krugman has carelessly neglected to spell out an important detail of his argument, let me fill in the gap for him: The Ricardian conclusion does not come from thin air; instead it follows logically from certain premises, key among which is that you're starting from an ideal policy regime.

[...]

Unless you believe that everything is perfect to begin with, the Ricardian argument fails, leaving you with no reason to believe that the cost of new spending should be spread widely. Instead, you should start by cutting back on your least wise activities.

One of my favorite interpretive principles is, "He said what he meant."  If we apply this principle to Krugman, then Landsburg's got him dead-to-rights.  Krugman is being Panglossian.  It is bizarre for a guy who thinks that Satan controls half the U.S. government to think that the status quo is remotely optimal.  And when the status quo is far from optimal, economics tells you to cut your worse programs first.

I have just one point to add.  Even if we did start from an optimal state, microeconomics still wouldn't tell us to cut a little of everything.  Why not?  Fixed costs.  Every proposed cut sparks a political battle.  Each of these battles is costly.  In order to cut a little from a million different programs, you'd have to fight a million costly battles.  Under the circumstances, standard, Panglossian micro tells us to pick fewer, bigger battles: To cut some programs a lot, and leave the rest alone.



COMMENTS (17 to date)
Paul writes:

"It is bizarre for a guy who thinks that Satan controls half the U.S. government to think that the status quo is remotely optimal."

You conveniently left out the section of Krugman's blog post that states that he is specifically going to make an argument in the intellectual framework of Ricardo as a way of strengthening his argument (i.e. even the theory Cantor is more likely to subscribe to doesn't support his argument):

"Still, it may be worth talking about just how bad an idea this is in terms of basic economics — and in this case, regular economics, not fancy-schmancy macro." He even includes a link to another blog post where he ridicules so-called "regular economics" making it clear he doesn't actually subscribe to such a theory and yet you and libertarians all over the blogosphere treat this as some sort of "OMG KrugmOWNED" moment. Don't you have anything better to do?

Nathan Smith writes:

I'm sort of with Krugman rather than Caplan here, unusually enough. If you're not at the optimal policy regime, there must be some structural reason that you're not at it, and you can't wave that away because there's a natural disaster. Given whatever complicated political constraint you're under, the best feasible response might still be to move a little bit at every margin. And I'm not sure about the fixed cost argument either. It might be that if you cut everyone equally, it seems "fair," and it will be easier to get the various stakeholders to go along with it.

PrometheeFeu writes:

@Paul:

"Krugman's blog post that states that he is specifically going to make an argument in the intellectual framework of Ricardo as a way of strengthening his argument (i.e. even the theory Cantor is more likely to subscribe to doesn't support his argument):"

Except Ricardo's framework only tells us Cantor is wrong in the made-up world where Krugman makes his demonstration. For Ricardo to show Cantor wrong, you MUST start with MC=MB before the disaster. If that is not the case, Ricardo's framework just says: "Once again, just as before the disaster, please set MC=MB."

Let me rephrase: Krugman analyses a world where MC=MB. He then uses that to make conclusions about the real world. So either Krugman is claiming that the real world is a world where MC=MB and his analysis is correct. Or Krugman believes that in the real world MC is not equal to MB and so his analysis is inapplicable and his conclusion wrong.

Paul writes:

@PrometheeFeu

My response was dealing with the stupidity of saying something along the lines of "OMG Krugman's example requires optimal policy, but he always bitches about Republicans. GG" (which both Bryan and Landsburg do) when it is clear that he does not personally believe in the hypothetical world he is describing rather he was using it to make a point as I mentioned previously. My intent was not to argue about the merits of Krugman's hypothetical example, but rather to point out the absurdity of using it as some sort of "gotcha" moment.

Ben writes:

Is the general rule here that if a theory doesn't perfectly match reality, you are not allowed to apply that theory?

Paul writes:

@PrometheeFeu

As to your other argument you say: "For Ricardo to show Cantor wrong, you MUST start with MC=MB before the disaster. If that is not the case, Ricardo's framework just says: Once again, just as before the disaster, please set MC=MB."

Even if MC=MB you can look at Cantor's argument and still conclude that it's silly. He argues we need to cut spending now as opposed to spreading it out over time (presumably because he believes the government cannot reliably commit to cuts at a later date) which is also implicitly arguing that the cost of additional debt and future taxes is too high relative to the cost of cutting spending now. Taxes are at historic lows and would have to would have to rise by a miniscule amount to raise enough revenue to pay for disaster relief and the real rate of return on long term U.S. debt is negative. The only cost benefit analysis that would yield a result of all spending cuts now would require an estimate of the costs of additional taxes that is at odds with the historical record particularly when you consider that he is essentially allowing spending to stay the same if additional funds are no allocated towards disaster relief. You can argue that Krugman cuts corners, but I still think you can make a case that Cantor's position is nonsense even with your different criteria.

Paul writes:

Bah I meant even if MC != MB

PrometheeFeu writes:

@Paul:
"when it is clear that he does not personally believe in the hypothetical world he is describing rather he was using it to make a point as I mentioned previously"

Bryan and Landsburg obviously do not believe that Krugman believes policy was perfect before the natural disaster. They were pointing out that for his argument to hold, policy had to be perfect and therefore his argument was wrong. They were merely poking fun at him for backing himself into a corner where he has to assume something he believes to be wrong to make his argument. I am not sure why you would consider pointing out such inconsistencies as stupid.

There is of course an alternate explanation for Krugman's argument: he cared more about scoring points against Cantor than about making a coherent argument and was willing to be intellectually dishonest while hoping no-one would notice.

I find it hard to believe that someone of Mr. Krugman's caliber could so grossly misapply something as simple as the theory in question. He has a whole paragraph where he lays out the real world implications of the starting assumption of MC=MB. How does he not pause while writing that paragraph and say to himself: "This is stupid. I don't believe that. Nobody does. And yet, my whole argument about Cantor rests on that assumption. Maybe I should write something different." I think all he wanted to do was score points against Cantor and he knew he would score more points with Ricardo than without Ricardo. So he just went ahead and wrote something he knew to be BS but which his readers would eat up because it feeds their beliefs. Bryan and Landsburg are right to call him on it.

@Ben:

You can if you explain why the theory is still applicable.

Paul writes:

@PrometheeFeu

Krugman was arguing that even under Ricardian theory Cantor is wrong in an attempt to demonstrate that even in the theoretical world he disagrees with, but Cantor is more likely believe in (Republicans invoke Ricardo all the time whether they know it or not when they argue against stimulus) Cantor's argument makes no sense. Pointing out that Ricardo's assumptions do not vibe with Krugman's world view is in fact stupid when Krugman has made it clear that he does not in fact believe in a Ricardian world.

Your argument about Krugman only being interested in scoring points against Cantor is hilarious. Do you have any idea how easy it is to demolish Cantor without using Ricardo (using Ricardo was more of a challenge. the whole point was to attack Cantor within his own theoretical framework). Cantor voted for every Bush spending agenda, all of his deficits and for the Paul Ryan plan. You do not need Ricardo to put Cantor's position to shame. You can argue that Krugman's Ricardian example is flawed (my last post was sort of a quasi response to that argument), but all this other "Krugman gotcha" crap is nonsense.

PrometheeFeu writes:

@Paul:

"The only cost benefit analysis that would yield a result of all spending cuts now would require an estimate of the costs of additional taxes that is at odds with the historical record particularly when you consider that he is essentially allowing spending to stay the same if additional funds are no allocated towards disaster relief."

That's not being nonsensical. Cantor didn't say that the raises in disaster relief are a good thing to have only if you lower spending in other areas. He just issued an ultimatum and is hoping the other side will give him what he wants in exchange for him giving what he already is willing to give. Not a bad bet given the recent past.

If you and I play chicken, it does not mean I want to crash. In fact, I don't want to crash, I just think I can make you swerve.

PrometheeFeu writes:

"Krugman was arguing that even under Ricardian theory Cantor is wrong in an attempt to demonstrate that even in the theoretical world he disagrees with, but Cantor is more likely believe in (Republicans invoke Ricardo all the time whether they know it or not when they argue against stimulus)"

But Cantor quite obviously does not believe that MC=MB, so this is not Cantor's theoretical world. This is Krugman's world specially made-up so Cantor would look bad.

"You do not need Ricardo to put Cantor's position to shame."

Quite true. But you can't keep repeating the same ones over and over again. Eventually you need new ones. Ideally, ones that are based on recent events so it looks to Krugman's followers like Cantor screws up majorly every single day and in the worst way possible.

"You can argue that Krugman's Ricardian example is flawed (my last post was sort of a quasi response to that argument), but all this other "Krugman gotcha" crap is nonsense."

Then why did Krugman make such a flawed argument? Why is it that he wrote: "What the government should do, in this case, is set all the marginals equal: the marginal benefit of an additional dollar spent on bombs, dental work, national parks, soup kitchens, etc, should all be equal, and this common marginal benefit should equal the marginal cost of raising an additional dollar of revenue." as a central part of his argument knowing full well, it is not born out by the fact, it is not believed by Cantor and it is not believed by himself? That's why I believe Krugman was trying to score cheap points. He chose an argument that was wrong in ways that anyone trained in economics would recognize but that would be missed by most of the population.

Sure, maybe he just messed up. But in that case, why not just say: "Sorry guys, I screwed up that last article. I still believe Cantor is wrong for reasons I highlighted before, but this one was a blooper on my part."

How about this: Do you believe that argument by Krugman against Cantor holds? Or do you believe that because the MC=MB was an assumption held by none in this debate, bringing it up and basing your argument around it is very much a screw up on Krugman's part?

Ben writes:

Clearly neither Krugman nor Cantor believe that MC = MB, though for very different reasons. Krugman's point is that independent of their disagreement about the size and scope of government, it doesn't make sense to think about the policy effects of random events like hurricanes in the same was as other policy.

Krugman is saying that no matter where Cantor believes policy should be in order for MC to equal MB, that Cantor's optimal policy should change when a disaster occurs (unless optimal spending on disaster relief is zero, which isn't what Cantor is saying). That is, whatever amount of disaster relief Cantor ideally wanted pre-Irene, he should want more now, and should be willing to pay for it through taxation/borrowing, as should anyone who believes disaster relief spending should be non-zero.

Krugman's criticism is of what he takes to be Cantor's policy preferences, when Cantor is obviously negotiating, but that's a perfectly reasonable thing to do; it exposes Cantor's posturing. To respond honestly, Cantor would need to admit either that (a) he's okay raising taxes when disaster strikes, (b) he doesn't support any funding for disaster relief, or (c) explain why his ideal levels of taxation and disaster relief spending don't change when a disaster occurs. The fact that MC != MB is irrelevant.

PrometheeFeu writes:

@Ben:

I have no problem with Krugman pointing out that Cantor is simply negotiating. (I don't think Cantor would deny that fact) But Krugman is pointing out that Cantor is posturing by making a dishonest argument himself. I'm not sure how we are better off now that we have a posturing politician and a posturing economist. Instead Krugman could have decided to make a good argument against Cantor's desired level of spending and the debate could have been moved upwards instead of downwards.

Shane writes:

"Each of these battles is costly. In order to cut a little from a million different programs, you'd have to fight a million costly battles. Under the circumstances, standard, Panglossian micro tells us to pick fewer, bigger battles: To cut some programs a lot, and leave the rest alone."

Perhaps it could be easier to signal to the population that an economic crisis must be avoided and therefore nothing can remain untouched. If people feel that cuts are distributed "fairly" then they may be more willing to suffer cuts themselves. But if they feel that there are protected interests going without cuts then they may protest more vigorously.

Ben writes:

@PrometheeFeu

I don't see dishonesty in Krugman's argument. He's basically saying, "Eric, we may disagree about taxation and spending, but we should be able to agree to finance disaster relief through taxation, because no matter what our preferred policy set is, it changes when a disaster occurs."

You might not think it a great argument, but to dismiss it as dishonest on the grounds that it relies on an assumption Krugman believes to be untrue seems a whole lot like the college sophomore who purports to refute economics by showing that humans aren't perfectly rational.

Gabe writes:

What a shame that such smart people, who influence so many more (often not so smart) people, make no effort to understand or consider public choice.

mark writes:

I thought this was brilliant:

"But Krugman is pointing out that Cantor is posturing by making a dishonest argument himself. I'm not sure how we are better off now that we have a posturing politician and a posturing economist."

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